Citi Research is out with a report on November 25th initiating coverage of Apple with a “Buy” rating and $675 price target, implying ~20% expected return. Shares of the iPhone maker closed at $571.50 a share in Friday's trading session. After a 28% correction since 09/21/12 (since recovered to down 19%), Apple shares are consistent with past corrections in its own history and that of its peers, according to Citigroup analysts. They note further that with y/y growth expected to stabilize in 1H13,this sets up Apple Inc. (NASDAQ:AAPL) to appreciate toward their PT. Citigroup has a price target of $675, they note that the price target is 11% below the consensus target, which reflects their perception that risks for Apple are increasingly coming into focus.

Below are the key points from Citigroup's 53 page report:

Enough of a Pullback?

Their analysis shows that Apple Inc. (NASDAQ:AAPL) shares have corrected consistent with the average correction in its own history, with companies that have achieved 4% of the S&P500, and with companies that have shown similar deceleration.

Historically, such corrections are followed by 20%-50% appreciation in the following 12 months. While a correction to below the average leaves risk, an adverse change in macro is required to take shares to these levels. While possible, they err on the side of optimism.

Risks are Increasingly in Focus

Observation of Apple shares versus its y/y rev. growth explains the recent sell-off. While easily attributable to the law of large
numbers, exogenous factors also play a role. Citigroup believes that Apple’s share of the smartphone market is at risk from low-end smartphones and competition from other eco-systems. They see upside from tablets, but this negatively impacts Apple's gross margins.

Meanwhile, they see other risks to gross margins, which lead them to model margins below consensus estimates. Nonetheless, they see caps to Apple’s P/E multiple (reflected in their PT), likely promoting a more trading bias for the shares.

Apple is Not Industry Specific

Citi notes that as the 51st buy rating out of 56 ratings on Apple Inc. (NASDAQ:AAPL) shares, their analysis is not unique, although it does follow a significant correction in Apple shares in the past two months, putting the shares at 11.3x FY13 consensus (versus S&P500 at 13.6x).

Citi notes that they are taking a unique team approach to Apple coverage. Coverage is led by Glen Yeung (Semiconductors), along with co-coverage by Walter Pritchard (Software), Kevin Chang (emerging markets) and Jim Suva (Hardware). Citigroup notes in their report, that this reflects Apple’s broad impact to the technology supply chain and allows them to follow the company from several industry angles.

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